Passing the Torch, Not Just the Cash: Using a CLT for Family Wealth & Charitable Smarts

You built a business over the decades and have reached the pinnacle of success: you have sold your business for a financial windfall. Taxes are paid, your bank account is full, and you want your family and their next generation to enjoy the new-found wealth.

And then the anxiety begins to creep in … is a sudden increase in wealth good for your children, their children, and other future generations? Are you going to accidentally create a generation of “trust fund babies” , entitled, spoiled, and not cognizant on how your decades of business struggle became “easy money” for them to spend.

Welcome to “sudden wealth syndrome” … the fear that your sudden liquid wealth may actually cause greater harm to your family than good.

One of the tools that can be used to avoid this is a charitable lead trust (CLT). It can prove to be a guard against sudden wealth causing familial harm. It provides a tax-efficient tool with a built-in waiting period that manages the influx of wealth over time and allows the business owner and their family to engage in creating charitable impact that can bring generations together in doing good.

This article will go  into detail on what a CLT is, how it can benefit charities and families, and the importance of creating a CLT before the business sale is completed.

How a CLT can be used as tax-smart tool for both heirs and charities

Charitable Lead Trust (CLT)

A CLT is a split-interest trust just like a charitable remainder trust (CRT). However, the process is reversed from the CRT. The benefits of the CLT are still split between the Income Beneficiary ( in this case, the charity(s)) and the Remainder Beneficiary ( you/your heirs).

This allows the business owner to make a charitable impact ( the lead interest) for the causes important to them for a period of years( 5, 10, 15 years, etc.) At the conclusion of that term, the remainder interest goes back to the former business owner or their heirs.

Just like a CRT, timing is key. The CLT must exist first before the sale occurs. If the IRS determines that the CLT was created after the sale was agreed to, the IRS can ignore the trust and tax you personally.

The Tax Value of the CLT

The IRS allows you to value a gift today based on what it is worth in the future. The term of the CLT provides the needed waiting period for future heirs to be able to enjoy future wealth that is tax advantaged.

Details to be aware of include:

• The "Time-Value of Money" Discount: The IRS recognizes that a dollar given to your heirs today is more valuable than a dollar given to them 15 years from now. When you put assets into a CLT, the IRS "discounts" the value of the gift to your heirs because they have to wait for it. The longer the charity receives the "lead" interest, the deeper the discount on the gift tax for your heirs.

• The "Hurdle Rate" Advantage (The 7520 Rate): Every month, the IRS sets a “hurdle rate” (also known as the Section 7520 rate). This is the rate of return the IRS assumes the trust will earn. If your trust assets (like business sale proceeds or high-growth stock) grow at a rate higher than this IRS hurdle rate, every dollar of that "excess growth" passes to your heirs 100% gift and estate tax-free. Example: If the IRS hurdle rate is 5% but your investments grow at 8%, that 3% difference compounds over 15 years and lands in your heirs' pockets without the IRS ever touching it.

• The "Zeroed Out" CLT: This is the ultimate goal for many business owners. You can structure the trust’s payments to charity so that the "present value" of the gift to your heirs is mathematically zero. This allows you to move millions of dollars to your children without using a single penny of your lifetime gift tax exemption ($15 million in 2026 per each individual giver; $30 million for a married couple). This leaves your exemption fully intact for other parts of your estate plan.

• Estate Freeze: With a CLT, you can freeze the value of your assets for tax purposes by moving them into a trust now. Any future appreciation happens outside of your taxable estate.

Example: If $1 million you put in the trust grows to $5 million by the time the trust ends, your heirs get the full $5 million, but the IRS only saw the original (discounted) $1 million.

The Philanthropic Apprenticeship

Beyond a savvy tax tool, a CLT serves as a philanthropic training ground where families can gather at an annual meeting to research nonprofits, pitch meaningful causes, and collaboratively decide on grant allocations—transforming wealth management into a shared lesson in responsibility and charitable legacy.

Final Thoughts

By the time the CLT terminates and the remaining principal goes to heirs, the family members have had 10-20 years of experience in managing wealth with a stewardship mindset instead of a personal spending viewpoint.

Creating a CLT is a complicated process. Helping a family plot their future giving can be no less easy.  At Generosity Nexus, we have a track record of helping donors and their families navigate down a potentially confusing path to determine what is best for them.

Put our depth of expertise to work on your behalf. Don’t hesitate to schedule an appointment to learn more about how we can help you.